Financial turnaround prompts cancellation of slot route deal

David Strow

Tuesday, June 26, 2001 | 10:36 a.m.

Alliance Gaming Corp. of Las Vegas on Monday called off the sale of its Nevada slot route operations, saying the deal no longer made financial sense.

Partly as a result, Alliance announced it would record a net loss for the quarter ending June 30, after recording nearly $10 million in one-time charges. Still, Alliance said it expects to post earnings of 70 cents per share for the quarter without those charges, which would beat analyst expectations by 5 cents per share.

This morning, Alliance stock shattered its 52-week high, rising $2.72 to $39.29 in very heavy trading.

Nearly one year ago Alliance announced plans to sell United Coin Co., the state's largest slot route operator with 8,860 machines, for $118 million. The buyers, an Iowa riverboat operator and a Las Vegas businessman, also signed an agreement to buy at least 2,500 slots from Alliance over a five-year period. Alliance said the $95 million cash provided by the deal after taxes would have been used to pay down $330 million in debt, saving the company $9.5 million per year in interest expense.

Today, however, the deal would not be accretive to earnings, as United Coin will produce more than $21 million in cash flow and $202 million in revenues in the fiscal year ending June 30, 2001, Alliance said. Selling the route would have wiped out $30 million of Alliance's $90 million in "carry-forward losses," or previous losses that can be used to reduce future income taxes.

Alliance will pay UC Acquisition Corp., a company owned by Michael Luzich of Las Vegas and Dan Kehl of Iowa, a $6.6 million break-up fee. This will reduce earnings by 58 cents per share in the June 30, 2001 quarter.

Kehl, general manager of the Catfish Bend riverboat casino in Iowa, said he wasn't surprised by the decision.

"We didn't really want the break-up fee, we wanted to buy a company," Kehl said this morning. "But Alliance has had a tremendous turnaround under (Chief Executive) Bob Miodunski and (Chief Financial Officer Robert) Saxton. It's a much different company now than when we negotiated this contract. We're definitely disappointed. We were really looking forward to owning United Coin, but they had to make a business decision, and I think they made a correct decision."

Kehl, however, said he and his partner aren't done with the Las Vegas gaming market yet.

"You probably haven't heard the last from us yet," Kehl said. "Las Vegas is a great market, a market we're definitely interested in getting into."

Alliance's turnaround in the year since the sale was announced has been one of the most dramatic in America. Though its debt levels have increased by about $10 million since the sale was announced, huge increases in cash flow have reduced the ratio of debt-to-cash flow from 6.6 times to 3.9 times.

After years of losses, the company's stock traded at $2.12 per share the day the deal was announced, and soon after drifted down to $1.50 per share.

Since that time, however, sales have increased dramatically at Bally Gaming & Systems, Alliance's slot machine manufacturing division. The company's casinos in Vicksburg, Miss., and Sparks, Nev., have also shown healthy financial improvements, and the company's long-suffering German amusement machine business has recovered. Strengthening results caused the company to repeatedly increase its earnings projections, and Alliance is saying fiscal 2001 will be its first profitable year in five years.

As a result, Alliance's stock has increased in value a staggering 25 times in less than a year, despite a general malaise in the stock market.

"This used to be very lowly regarded management," said Dave Ehlers, chairman of Las Vegas Investment Advisors. "What Wall Street is saying (now) is, 'You're really great.' Wall Street's perception of Alliance Gaming has changed dramatically. The story got nothing but better and better and better."

The company is now projecting it will report a loss of 17 cents per share for the quarter ending June 30, after taking $9.8 million in one-time charges. About $6.6 million, or 58 cents per share, come from the break-up fee; an additional $3.2 million, or 29 cents per share, in non-cash charges will come from Alliance's refinancing of $230 million in senior bank debt.

The refinancing reduces Alliance's interest rate on the debt by 1 percentage point and should provide the company "with both increased financial flexibility and liquidity," Saxton said.

For the year ending June 30, the company is projecting earnings of $1.27 per share, revenues of $525 million and cash flow of $87 million. In fiscal 2002, net income should rise to $3.05 to $3.15 per share, revenues to $590 million, and cash flow to $105 million, the company projected.

"(The company's) new credit facility, along with the substantial and stable cash production provided from the company's route operations and casino operations, will enable us to leverage the growth assets within Bally Gaming and Systems, and this is reflected in the 40 percent growth in earnings per share we are currently projecting for 2002," Miodunski said.